Why GE is making a dramatic overhaul to its board of directors

General Electric CEO John Flannery is expected to lay out significant changes for the U.S. company. (Richard Drew/AP Photo)

The corporate boardroom is not a place where change typically happens swiftly. Few board seats have term limits, the job offers a lucrative post for retired executives (albeit one with increasing pressures), and continuity is typically valued as much as new perspectives. "At the board level, change is like a glacier -- it moves very slowly," said Peter Crist, chairman of the executive search firm Crist Kolder Associates, noting that no more than one or two changes a year is typical on most corporate boards.

But on Monday, General Electric shared details about a shakeup that's unusual in corporate America, disclosing an overhaul to its board that included the departure of eight directors, the nomination of three new members and an eventual change next year in its independent lead director.

The announcement, which follows a precipitous fall in its share price in recent months and weeks of troubling headlines for investors, was first discussed by new CEO John Flannery in November and had been expected. If shareholders approve the nominees, the industrial giant will have just 12 directors -- far closer to the average size board and 33 percent smaller than the 18-member board it had a year ago.

Combined with additional departures and changes the board made late last year -- when GE added Edward Garden, a founding partner of Nelson Peltz's Trian Fund Management to its board after pressure from the activist investor -- the revamp amounts to the kind of overhaul advisers on governance and board recruitment say is extremely rare, if well overdue at the embattled company.

"That’s something they should have done a long time ago," said Charles Elson, the director of a corporate governance center at the University of Delaware. "Absent a proxy fight, it’s extremely unusual that that many directors would leave," he said, noting "it's usually a company in crisis" that announces that kind of revamp, sending a signal to investors about pending change, as boards help advise management on strategic direction and oversee their decisions.

GE's announcement follows a drumbeat of difficult headlines. While the broader market surged in 2017, GE's stock fell more than 40 percent, the worst performer in the Dow Jones industrial average. In January, the company disclosed a $6.2 billion charge following a review of its GE Capital insurance portfolio, and the U.S. Securities and Exchange Commission is investigating some accounting practices. On Friday, the company said it would restate its 2016 and 2017 earnings as it adopts a new accounting standard; meanwhile, some of its businesses have posted steep profit declines and talk of a break-up has continued.

In a separate letter to investors that was also released Monday, GE CEO Flannery said "our leadership team, board and employees have devoted meaningful time to identifying lessons we ought to learn and how we ought to be applying them" and that "our eyes are wide open," noting significant changes are already underway. "That said, how the company is being portrayed in certain quarters is overwrought and, in most cases, does not reflect the reality of GE that our customers and employees are seeing around the world."

In the letter, Flannery addressed the board changes, saying the significantly reduced board size and "new experts with fresh perspectives" would "continue to help move GE forward."

Meanwhile, in a statement announcing the nominees and departures, lead independent director and former Vanguard CEO Jack Brennan, who will not stand for re-election in 2019, said "the smaller board will also help to promote the heightened engagement and sense of accountability that we want to drive at every level of the company." GE said it considered factors such as industry expertise, operational track record and "cognitive diversity" as it weighed how to revamp the board, as well as noting that Brennan asked for feedback from major investors.

The changes include nominating the former chairman of the Financial Accounting Standards Board, Leslie Seidman, and two industrial executives, former American Airlines CEO Thomas Horton and former Danaher CEO H. Lawrence Culp, to the company's board. Some analysts particularly cheered Culp's nomination, saying he hails from a well-run, highly respected company and would be well positioned to help Flannery with what's needed at GE.

Nicholas Heymann, an analyst at William Blair & Co., said investors would likely view the board overhaul as "overdue, and the question in people's minds will be 'will this be enough?' " But he thinks efforts such as the board overhaul, changes to compensation practices and the CEO change are signs the company is approaching its problems seriously. "This is not the standard whitewash," he said.

At least one media report last week suggested some board members may have thought an even bigger revamp was due. The Wall Street Journal, citing unnamed sources, has reported that several directors had discussed whether the entire board should be fired.

A GE spokesperson said in an emailed statement that it would not comment on the board's deliberations but that "the board has been committed to critically assessing its own performance, and the smaller board size is just one reflection of the increased engagement and accountability that the board intends to promote at all levels of the company." In revamping the board, directors "wanted to ensure that the board collectively had the skills, industry expertise and familiarity with the company necessary to exercise effective strategic oversight," which "meant keeping directors with a mix of tenures, including a handful who have served on the board for a number of years."

With the announced changes, some of GE's longest-serving members will depart, including Andrea Jung, the former Avon CEO who had been on GE's board since 1998, and Rochelle Lazarus, the longtime Ogilvy & Mather executive who had been a director since 2000. If the nominated directors are approved by shareholders at the annual meeting in April, seven of the 12 directors will have served on the board for two years or less.

Governance experts said that even for a company as sprawling as GE, 18 members is far too large. It's hard for the CEO to easily communicate with that many people and it can be awkward for directors to speak up amid such a large group.

According to research, the average board is now about 10 or 11 members, said Michael Useem, a professor at the University of Pennsylvania's Wharton school. That size, he said, "has become the norm for very good reason." It's big enough for all the needed areas of expertise to be covered, but not so big that members can get disengaged or overlooked. "

GE's board has been an outlier at 18 for quite some time," Useem said, noting the company is "playing catchup." Some chairmen like to go around the table asking each director what they think about a problem -- "and that can get tedious when you have 18."

Some governance observers said another reason companies don't often make big changes to the board at once is they don't want to lose too much institutional knowledge at one time. The learning curve, after all, will be steep for the many new directors at GE.

"You're going to lose some wisdom by having this much turnover, but under the circumstances -- because you're having this triage -- that's understandable," Useem said. "There's enormous pressure on the company, investors are saying you've got to restructure, and this has just told the market the board is going to do that."

Jena McGregorJena McGregor writes on leadership issues in the headlines – corporate management and governance, workplace trends and the personalities who run Washington and business. Prior to writing for the Washington Post, she was an associate editor for BusinessWeek and Fast Company magazines and began her journalism career as a reporter at Smart Money. Follow